People worried about changes to inheritance tax law can use little-known allowances to gift up to £12,000 in a single year, according to a BBC Radio 4 programme. From April 2027, pension pots left after death will become subject to inheritance tax, prompting many to review how much they can pass on.
New pension tax rules from 2027
From April 2027 any pensions left after a person passes away will be subject to tax, BBC Radio 4’s Moneybox programme was told. The change has led to many people looking again at what they can leave their families and how to give as much as possible without losing large chunks in tax.
In the UK, you can reduce your Inheritance Tax (IHT) by using tax-free allowances including the £3,000 annual exemption, £250 small gift allowances, and the seven-year rule for larger gifts.
How to give up to £12,000 tax-free
Listener Simon said he and his partner want to help their children while they are still alive. Both sons are thinking about getting married. Simon asked if he gave £13,000 in one year, exceeding the £3,000 rule by £10,000, then ‘two weeks later I was hit by a bus at what point do HMRC tax that money. Would the tax man just take 40% of that £10,000 or does that get added to the value of my estate and only taxed on the overall value of the estate?’
David Dodgson, chartered financial planner from The Private Office, responded: “Not immediately, no. What a lot of people forget to think about are the exemptions you’ve got in terms of inheritance tax. One of the really important ones is regards to marriage because you’ve got the ability to gift £5,000 to your child in respect of their wedding, and that won’t be subject to an inheritance tax liability.”
Host Paul Lewis added: “And of course there’s a £3,000 limit apart from that and it applies to married couples - they each have that £3,000 and I think you can go back a year - so can you actually give £12,000 away without worrying about it if you haven’t done it before?”
Surplus income and record-keeping
On the issue of gifts from surplus income, Mr Dodgson explained: “It’s attracting a lot of attention at the moment. Essentially it’s really important that you assess whether or not you’ve actually got any surplus income because if you have and you can prove it and document it you can give that away on a regular basis and when you’ve passed away, your executor if they’ve got evidence that it was surplus income, ie, above your expenditure requirements, that will not be within the inheritance tax net.”
In terms of records for regular gifts, he advised looking at the IHT403 form HMRC has on its website, which has a breakdown of the sorts of things to document. Mr Dodgson said: “A key catalyst for this sort of gifting has undoubtedly been the impending disappearance of pensions into the IHT net from April 2027. That has resulted in people thinking ‘right I don’t want to have my pension subject to an inheritance tax - what can I do with it.’” He added: “Well you can start gifting away regularly during your lifetime to reduce the amount in your pension that’s going to be subject to inheritance tax liability.”
Mr Lewis added: "Inheritance tax is probably the most hated of all taxes - even though in fact 19 out of 20 estates do not pay it. The threshold where it begins though has been frozen at £325,000 - in its case since 2009. From April any pension money that’s left over when you finally go will count as part of your taxable wealth too and so the number paying it will rise."
What counts as a gift
HMRC says gifts include: money; household and personal goods (e.g., furniture, jewellery or antiques); a house, land or buildings; stocks and shares listed on the London Stock Exchange; unlisted shares you held for less than 2 years before your death. A gift can also include any money you lose when a person sells something for less than it’s worth. Anything people leave in their will does not count as a gift but is part of their estate.
Married couples and civil partners in the UK benefit from a 100% spousal exemption, allowing unlimited assets to pass tax-free upon death. Unused tax-free allowances (£325,000 nil-rate band and £175,000 residence nil-rate band) can be transferred to the survivor, enabling a combined total of up to £1 million to pass tax-free. Unmarried cohabiting partners do not receive these exemptions.
Rules on giving gifts
HMRC says Inheritance Tax may have to be paid after your death on some gifts you’ve given. Gifts given less than 7 years before you die may be taxed depending on who you give the gift to, the value, and when it was given. The annual exemption allows you to give away £3,000 worth of gifts each tax year without them being added to the value of your estate. You can give up to £3,000 to one person or split it among several. Unused annual exemption can be carried forward to the next tax year - but only for one year.
Small gift allowance: you can give as many gifts of up to £250 per person as you want each tax year, as long as you have not used another allowance on the same person. Birthday or Christmas gifts from your regular income are exempt. Through the seven-year rule, no tax is due on gifts if you live for 7 years after giving them (unless the gift is part of a trust). If you die within 7 years, the tax depends on when the gift was given: gifts in the 3 years before death are taxed at 40%; gifts 3 to 7 years before death are taxed on a sliding scale known as ‘taper relief’, which only applies if total gifts exceed the £325,000 threshold.
